Monday, February 15, 2016

US Labour market, retail sales consistent with continued economic expansion

Our view is continued improvement in the US labour market will support solid consumer spending and keep the economy on track for another year of modest growth.  Latest labour market indicators including the JOLTs and NFIB surveys remain solid and jobless claims dipped lower again, supporting the argument the weakness of the past few weeks in that series may have been due to seasonal adjustment issues.

The Job Openings and Labor Turnover Survey (JOLTS) showed no sign of a cooling labour market.  Job opening stood at 5.6m in December or an annual growth rate of growth of 3.8%.  The Quit Rate is now at +2.1%, a high for this expansion.  This reflects people finding better job opportunities in a well-performing labour market.  This is also positive for wage growth as people mostly leave their current job for better prospects and higher pay.

 The NFIB small business survey dipped lower in January, most likely due to the volatility in the share market.  Hiring plans fell to a net +11, so lower and consistent with a lower level of payrolls growth in January.  But labour market tightening could be a factor.  As the economy gets closer to full employment full employment labour hiring slows and it gets harder for firms to find the right people for the job.  In this survey 29% of businesses with job openings reported having difficulty finding the right person, a high for this expansion.

Retails sales were really strong following the disappointing December result which was revised up and now suggest the US consumer ended the year in fine fettle.  Control group sales (the part that feeds directly into GDP) were up +0.6% in the month suggesting retail spending is off to strong start in 2016. 

None of this makes the FOMC’s job any easier in determining the outlook for interest rates.  The critical judgement for the FOMC is to decide whether recent economic and market developments leads to a slowdown in growth and whether the softness in some labour market indicators are genuine softness or simply characteristic of late cycle labour market developments.   Last week’s Congressional Testimony suggests FOMC Chair Janet Yellen is keeping an appropriately open mind.

We continue to believe recent weakness in the data is transitory in nature due to the inventory cycle and the sharp slowdown in oil-related investment and that fears of recession are well wide of the mark.  We put the probability of recession at 25%.